Friday, 10 June 2011

Today's commentary in the Financial Post by William Robson of the CD Howe Institute, CPP is a gamble, not a guarantee, attacks the CPP with bizarre arguments that indicate nothing about the CPP's riskiness, nor the merits of expanding the CPP.

Robson asserts that CPP proponents are going around claiming that the CPP is fully funded in the sense that all future obligations can be met with assets on hand, or alternatively that its promised benefit payments can be met at the current 9.9% contribution rate. Huh? One would have to be very ignorant of CPP not to know that the payments and contribution rates fundamentally and forever rely on a substantial continuing inflow of funds from current workers. The CPP will never be fully funded in the ultra-narrow, unrealistic sense that Robson defines as being invested only in real return bonds. It was not designed that way, it doesn't work that way and it would be stupid to do it that anyhow.

Whether one quibbles, as Robson does, about the use of the word guarantee, promised, targeted or anything else to refer to the likelihood future CPP payments will be met doesn't matter. What does matter is whether the whole CPP set-up as it is now structured, will be able to make those payments. Robson surely knows full well that the CPP gets regular health checks by the Chief Actuary of Canada. Go to the CPPIB website and read FAQ number one: "Canadians’ CPP pensions are not at risk and Canadians should not be concerned about their CPP pensions. In November 2010, the Chief Actuary of Canada reaffirmed through his triennial review that the CPP remains sustainable at the current contribution rate of 9.9% throughout the 75-year period of his report." Or, read for yourself the latest actuarial report here.

Robson says the CPP is a gamble because it relies significantly on investments across a whole range of asset types other than real return bonds to attain its required 4% real return. No private or public pension could or would ever follow an investment policy of exclusively RRBs, which Robson sets up as his acid test of riskless. Conversely, just about every pension plan invests with a mix of assets like the CPP. Besides, RRBs are only as good as the government backing them. It was not long ago that Canada's credit rating was in jeopardy. Now it's the turn of that other riskless asset, the US Treasury Bill to begin looking somewhat dodgy. So, strictly speaking, RRBs would be a gamble too. In an absolute sense, the CPP is a gamble, not a sure thing. But I'd say it's not a 50-50 gamble, more like 95+% chance of success. Robson must know that too and his use of the word gamble sure looks deliberately designed to overstate the risks of the CPP, i.e. intended to stop support of CPP expansion by spreading Fear, Uncertainty and Doubt (FUD) among FP readers.

One can infer some good news from this piece, however. If this is the best criticism CPP opponents can come up with, then CPP must be pretty good. Also, for it to be worthwhile to write and publish such an attempt to reduce CPP's public support, it must mean that CPP expansion is still being considered in the corridors of power.